Daily Insight

The Dollar made widespread gains against the majors yesterday, rising 0.5% versus the Euro and a further 0.4% against the Pound following another band of positive U.S economic data. Following the unexpected rise in manufacturing activity on Tuesday, the U.S currency managed to gain momentum as a separate report called in to question the idea of a gradual slowdown in economic growth and the prospect of an interest rate cut later in the year. Durable goods orders rose above initial forecasts in March, which correlates with the surprising rise in manufacturing output and reinforced signs that business investment would recover going into the second quarter. Factory orders climbed 3.1%, the highest monthly gain in a year and excluding the volatile transportation gauge, bookings rose 1.9% following a no change in February. Elsewhere, the Dollar continued to gather pace to close last night well under the $2.00 barrier despite a seemingly negative outlook on the U.S labour market. The ADP employment report showed that the economy added the fewest jobs in almost four years last month. The report should provide an insight into the monthly U.S job report this Friday and it is widely anticipated that the unemployment rate jumped to 4.5% in April while average hourly earnings remained unchanged. The Dollar may make further gains against the majors this afternoon as U.S worker productivity probably grew at a slower pace in the first quarter although unit labour costs may have increased.

The Euro managed to make further gains against the Pound yesterday but came under pressure versus a resurgent U.S Dollar, triggered by a series of disappointing economic reports. Earlier this week, German retail sales fell dramatically and provided an insight in to consumer confidence while separate reports yesterday showed that German unemployment and Euro-zone manufacturing fell short of expectations. Nevertheless, the German jobless rate did hold steady at 9.2% in April, which equals the lowest level of unemployment in nearly six years with the number of people out of work falling by 9,000. That figure was significantly lower than expected as economists had forecast a drop towards 40,000 claims last month. Elsewhere, the Purchasing Manager's index on European manufacturing growth was also under initial expectations and the data yesterday provides an indication that a strong Euro combined with the VAT increase at the start of the year is beginning to have a negative impact on the economy. There is a sparse supply of economic data in the Euro-zone this morning but the Euro may continue to make gains against the Pound after ECB governing council member Liebscher reiterates that the Central bank must remain vigilant on inflation.

Following the unexpected drop in UK manufacturing activity earlier this week, the Pound has fallen considerably against the majors and that trend continued yesterday following another round of negative economic reports. UK mortgage approvals declined to the lowest level in nearly a year in March and provides the first indication that higher interest rates are beginning to slow the property market. Despite house prices rising significantly in the preliminary estimates for the first quarter, the upward swing is likely to lose momentum this year with lenders approving the least amount of loans since April 2006. In addition, the Confederation of British industry has recently reported that the UK retail price index is at the strongest level in two years but if house prices start to retreat, consumers are unlikely to maintain the pace of spending. As a result, the Pound came under increased pressure yesterday as we look to retest the trend support at 1.9875 versus the Dollar with the data reducing the prospect of a 50 basis point hike next week.

Data Released 3rd May

UK 09:30 Producer Prices Index (March)

UK 09:30 CIPS Services Survey (April)

U.S 13:30 Productivity (Q1 Prelim)

- Unit Labour Costs

U.S 13:30 Jobless Claims (w/e 28th April)

U.S 15:00 ISM (Non-manufacturing) Index (April)

written by Adam Solomon